India is among the most dollarised countries as far as invoicing is concerned, and by all these measures of internationalisation, the dollar is largely ahead of other currencies with euro as a distant second, Professor Hélène Rey, Lord Bagri Professor of Economics, London Business School, said.
Ms. Rey was speaking at the Export-Import (EXIM) Bank of India’s 35th Commencement Day Annual Lecture in Mumbai on ‘financial globalisation and international financial markets’.
“While international reserves are held in dollars, dollar is a vehicle currency on the foreign exchange market.
“One can also see the U.S. as an insurer, since the value of its external dollar liabilities such as Treasury bills and U.S. government bonds held by the rest of the world tend to appreciate in bad times, thereby insuring the people holding them,” she said.
As a result, the U.S. gets seigniorage as people from different countries use dollars, she said, adding that India was one of the most dollarised countries in the world, following Brazil, Pakistan and Indonesia, in the share of imports and exports invoiced in dollars.
Ms. Rey said that according to a survey by the European Central Bank, the dollar dominated 62.2% international debt, 56.3% international loan and 62.7% global exchange reserves, whereas the euro had acquired much less global market.
“The dollar is becoming more unstable over time as the relative size of the U.S. shrinks in the world economy while the stock of dollar liabilities in the rest of the world keep growing,” she added.
“Euro maybe the closest substitute to dollar, as the euro area is comparable to the U.S. in terms of economic size and in international trade, but the incomplete architecture of the of the euro area with 19 finance ministries backing the currency, and the absence of a euro area wide safe assets inhibits the internationalisation of the euro,” she said, adding that the cryptocurrency and the private or public digital currency were alternate options, but would not play an important role in the international monetary system.
“People are not clear about where would they make the payments through the cryptocurrency. Private digital currency has a threat of cybersecurity whereas the legal framework here also remains unclear. Therefore, there is no alternative to the dollar which can be seen for other couple of decades,” she added.